Keep Investor Support When Your Business Is In Crisis

Todd Hixon
, ContributorI blog about entrepreneurs, their world, and the new, new thing.Opinions expressed by Forbes Contributors are their own.

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Almost every start-up has near-death experiences: times when the business is not delivering, money is short, and employees are wavering. Entrepreneurs often call on investors to give them sea room in which to fix problems and rebuild momentum. Great leaders use the tools described below to rebuild investor confidence and win another chance to succeed.

These "moments of truth" test investors' confidence in the business, its leadership, and their own judgment. Investors' decisions are based on a combination of logic and emotion. They will look at the company's data carefully and re-examine the investment case: is the market developing, do customers value our product as much as expected, has another company taken the lead, can a big win still happen?

At the same time they will experience an up-welling of feelings that have decisive impact. When I've been in this situation, here is how I have felt:

Frustrated because promised results have not been achieved, for the nth time,

Blind-sided and embarrassed if I just learned that the state of the business is much worse than I knew, and much worse than I told my partners,

Let down and angry if someone I trusted has been hiding the severity of the problem or is failing to take responsibility,

Disillusioned that the vision in which I have long believed seems lost,

Foolish, because it now looks like I should have stopped supporting this business a while back, and I know that supporting failing businesses too long is a mistake for which investors are often criticized, and

At the same time, hopeful that a way to fix the business can be found, because failure will hurt the employees; writing off all the money, faith, and relationships tied up in this investment will be very painful; and saving them will be a great relief.

Handling bad news and failure separates great leaders from others. I have watched many entrepreneurs do this very well over the years. Each leader has his or her own style, however, they employ most or all of the following strategies.

Get all the bad news on the table up-front. Partly this is about managing feelings: you want your listeners to get through the depression caused by bad news, and then build their enthusiasm back up. And you need to reestablish credibility by revealing everything your stakeholders need and want to know. Hiding problems at this stage is toxic: as they say in DC, the consequences of the cover-up are always worse than the offense itself. So take the trash out, and then get to work solving problems.

Take your share of the blame, and don't go after people, even if they deserve it. No one is blameless in a bad situation. If you focus on blaming others it will look like you are trying to hide your own mistakes. This "control the narrative" strategy may work in politics, but it seldom works with a sophisticated business audience.

Think deeply about what caused the problem, and what change can fix it. Your audience has lost faith in yesterday's strategy. To buy back in, they need to understand why the company will be more successful going forward. That requires a new approach based on facts and well-reasoned plans.

Make believable projections. Investors know they have lost ground from their prior expectations. Lay out a path to a good outcome that stands up to scrutiny. Include some measurable milestones in the near future, so investors can feel they are "putting down money to see another card." Lofty promises don't work in these situations; you probably got where you are by over-promising. Reestablishing credibility is job one.

Display competence, confidence, and determination to succeed. Investors need to see how deeply you understand how the business works, where it is going, what needs to happen, and how to get things done. More important, you need to show you believe your turnaround strategy will work and you are committed and determined to push through to success. Speak calmly about the problems: a measured, confident tone is remarkably effective making problems seem manageable.